June 15,
2009
VIA FAX
AND EDGAR
Securities
and Exchange Commission
Mail Stop
4561
100 F
Street, N.E.
Washington,
D.C. 20549
Fax nr.
703-813-6981
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Attention:
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Tamara
Tangen
Division
of Corporate Finance
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Re:
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Wayside
Technology Group, Inc.
Form
10-K for the Year Ended December 31, 2008
Form
10-Q For the Quarterly Period Ended March 31, 2009
SEC
Comment Letter Dated May 18, 2009
File
No. 000-26408
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Dear Ms.
Tangen:
Please find below our comments and
explanations in reply to your letter dated May 18, 2009. We will do our utmost
to explain our position to you and hopefully you will find our explanations
satisfactory. With this stated, we welcome any help in improving the overall
disclosure of our filings. Should you have any further questions or remarks,
please do not hesitate to contact us. For your convenience, we have
reproduced below in italics each of your comments and have provided the
corresponding response immediately below each comment.
Additionally, we acknowledge
that:
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We
are responsible for the adequacy and accuracy of the disclosure in the
filings;
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Staff
comments or changes to disclosure in response to staff comments do not
foreclose the Commission from taking any action with respect to the
filings; and
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We
may not assert staff comments as a defense in any proceeding initiated by
the Commission or any person under the federal securities laws of the
United States.
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FORM 10-K filed for the
period ended December 31, 2008
Part 1, Item 9A Controls and
procedures
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Comment
1.
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We
note your statement that a “the design of any system of controls is based
in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions, regardless of how
remote.” We note similar language in your Form 10-Q filed on
May 12, 2009. Please revise future filings to state clearly, if
true, that your disclosure controls and procedures are designed to provide
reasonable assurance of achieving their objectives and that your principal
executive officer and principal financial officer concluded that your
disclosure controls and procedures are effective at that reasonable
assurance level. In the alternative, remove the reference to
the level of assurance of your disclosure controls and
procedures. Please refer to Section II.F.4 of Management's
Reports on Internal Control Over Financial Reporting and Certification of
Disclosure in Exchange Act Periodic Reports, SEC Release No. 33-8238,
available on our website at <http://www.sec.gov/rules/final/33-8238.htm>.
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Our
future filings will be revised as follows:
Evaluation of Disclosure Controls
and Procedures. As required by Rule 13a-15(b) under the Exchange Act, our
management carried out an evaluation of the effectiveness of the design and
operation of the Company’s “disclosure controls and procedures”, as such term is
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end
of the period covered by this report. This evaluation was carried out
under the supervision and with the participation of our management, including
our Company’s President, Chairman of the Board and Chief Executive Officer
(principal executive officer) and Vice President and Chief Accounting Officer
(principal financial officer). Based upon that evaluation, the Company’s Chief
Executive Officer and Chief Accounting Officer concluded that the Company’s
disclosure controls and procedures were effective, as of the end of the period
covered by this report, to provide reasonable assurance that information
required to be disclosed by the Company in the reports it files or submits under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms
and is accumulated and communicated to the Company’s management, including the
Company’s Chief Executive Officer and Chief Accounting Officer, as appropriate,
to allow timely decisions regarding required disclosure.
Notes to the Consolidated
Financial Statements
Note 2 - Summary of
Significant Accounting Policies
Revenue Recognition, page
F-10
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Comment
2.
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We note that a majority of your
revenue is recognized on a gross basis. Please provide a full
description of how you considered each of the indicators of gross and net
revenue reporting set forth in EITF 99-19. Your response should
include a discussion and conclusion on each of the indicators set forth in
paragraphs 7-17.
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We are
strictly a reseller of software and the software we resell does not require any
production, modification, or customization. We do not publish, design
or develop software. The software publisher develops the software we sell. We do
not add any software or provide services other than the logistic delivery of the
product to the user of the product. This service is not essential to the
functionality of the software or other products provided. We do not have any
arrangements providing for multiple software deliverables, accordingly, we do
not have multi-element arrangements.
In 2008,
all of our revenue was reported as Gross Revenue as we did not incur any sales
that had to be reported as Net Revenue. In 2007 we reported $40,000 as Net
Revenue, which was deemed to be an immaterial amount. We did not incur any
deferred revenue in 2008 or 2007.
The
following is a discussion and conclusion of each of the indicators set forth in
EITF 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent”,
paragraphs 7-17.
Indicators of Gross
Reporting
7. The company is
the primary obligor in the arrangement -
We are
the primary obligor, and are seen as the primary obligor by both our vendors and
customers, based on the following facts:
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a.
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We
are responsible for the entire fulfillment process, including influencing
the customer as to what product(s) to purchase and the ultimate
acceptability of the products ordered and purchased by a
customer.
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b.
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The
Company is responsible for customer satisfaction, billing and invoicing
and handling and resolving disputes that may
arise.
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c.
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The
customers’ first contact if any questions should arise is the Company. The
Company is responsible to resolve the customer’s questions and/or
complaints. If it is a product performance related issue, the Company
might involve its vendor if technical expertise is needed to explain
functionality to the customer.
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8. The company has
general inventory risk (before customer order is placed or upon customer return)
- -
We have
inventory risk for the products we sell, based on the following
facts:
We take
ownership of the products we sell, no matter how the software is delivered. The
majority of the products that we sell are delivered via drop shipment, meaning
an order is fulfilled directly from a warehouse of our distributor or vendor and
delivered to our customer. However, at the moment we place the order with our
vendor and the products leave the distributor or vendor, we take ownership of
the products and we have the primary obligation to pay our vendor for the
purchase of the products. We are responsible for returns and we take title to a
product if it is returned by a customer. Our customers generally have 30 days to
return a product.
9. The company has
latitude in establishing price -
We have
sole discretion in establishing pricing for the products we sell. We operate in
a low margin and very competitive industry. Products that we sell are typically
sold by a variety of competitors, small and large. Price setting and pricing
strategy is a very important competitive tool in our industry.
10. The company
changes the product or performs part of the service -
We do not
change the products we sell in any way.
11. The company has
discretion in supplier selection -
In our
Programmers Paradise segment, we typically have discretion in supplier selection
as the products we sell are available at multiple distributors, resellers and/or
directly from the vendor. Suppliers are selected on availability of the product,
as well as pricing, including pricing for shipping and handling. Products are
typically available at lower prices from distributors than directly from a
vendor.
In our
Lifeboat segment, we act as the distributor for software vendors and the
specific products we are authorized to distribute.
12. The company is
involved in the determination of product or service specifications
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Based on
the request of a customer, we assist in determining the quantity, type and sort
of products a customer acquires. The majority of our products sold are software
licenses. Software license programs vary enormously from vendor to
vendor. Our expertise allows us to assist customers with selecting the correct
license should this be required.
13. The company has
physical loss inventory risk (after customer order or during shipping)
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We take
ownership of the products we sell, no matter how the software is delivered. The
majority of the products that we sell are delivered via drop shipment, meaning
an order is fulfilled directly from a warehouse of our distributor or vendor and
delivered to our customer. However, at the moment we place the order with our
vendor and the products leave the distributor or vendor, we take ownership of
the products and we have the primary obligation to pay our vendor for the
purchase of the products. We are responsible for returns and we take
title to a product if it is returned by a customer. Our customers generally have
30 days to return a product.
14. The company has
credit risk -
The
Company has credit risk as it is responsible for collecting the sales price from
its customers and must pay the amount owed to the vendor/supplier regardless of
whether the sales price is fully collected. The guidance mentions that credit
risk is mitigated if the customer pays by credit card and the Company obtains
authorization for the charge in advance of product shipment. The Company does
have credit card sales; however, they represent less than 10% of total sales. In
addition, credit risk could still exist on these credit card sales based on the
risk of a fraudulent sale. In conclusion, the Company is deemed to have credit
risk.
Indicators of Net
Reporting
15. The supplier
(not the company) is the primary obligor in the arrangement -
As
indicated, our suppliers are not the primary obligors.
16. The amount the
company earns is fixed -
The
amount the Company earns is not fixed. Products that we sell are typically sold
by a variety of competitors, small and large. Price setting and pricing strategy
is a very important competitive tool in our industry.
17. The supplier
(and not the company) has credit risk -
As
discussed under 14, our suppliers do not have credit risk. We refer to page F-24
of our financial statements for amounts charged to our allowance for accounts
receivable.
Based on
these facts, we believe that our revenue transactions were, and are, properly
recorded. In instances where the Company only earns a commission
based on order amount and where vendors are responsible for collection, the
Company records these arrangements on a net basis. As stated before, this was
not the case in 2008.
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Comment
3:
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Tell
us how you determine the payment terms offered to your customers and what
you believe your normal and customary payment terms to
be. Describe any extended payment term arrangements offered to
your customers and tell us how you recognize revenue on arrangements
subject to such terms. In supporting your accounting for these
arrangements, refer to paragraphs 27 through 30 and paragraphs 112 and 113
of SOP 97-2. In addition, explain why the accounts receivable
balance increased significantly during first quarter 2009 and indicate the
type of customers that have these balances. Further, indicate
the impact of these increases in receivables on your liquidity and explain
how your MD&A addresses those liquidity
impacts.
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Our
payment terms are payment via credit card, payment on account (typically within
30 days from receipt of the invoice) or payment on extended payment terms, based
on request of our customer. Our average days’ sales outstanding in 2008 was 35
days, in 2007 it was 49 days. Our payment terms do not vary by customer type,
arrangement size, or product mix. Returns are permitted within 30 days, if
products are in a resalable condition. Returns
are minimal and amounted to approximately $3.5 million in
2008.
The
following table indicates revenue per payment term;
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Sales
in 2008
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Credit
card
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$ |
11.3 |
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mln
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6.5 |
% |
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Payment
on account, typically 30 days
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$ |
151.2 |
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mln
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86.9 |
% |
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Extended
payment terms
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$ |
11.5 |
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mln
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6.6 |
% |
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Total
Sales in 2008
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$ |
174.0 |
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mln
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100.0 |
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Our
payment terms are determined based on the creditworthiness of a customer and in
most cases are net 30. Each new customer is required to fill out a credit
application. Based on this credit application, our credit department performs a
creditworthiness review that can include review of public filings, reports from
credit agencies, financial filings, reports obtained from banks as well as
supplier references. The credit department and Chief Accounting Officer
meet on a weekly basis and any past due accounts are discussed and if warranted
are placed on credit hold.
Extended
payment terms can be requested by a customer. Extended payment terms are
standard business practice. As indicated, in 2008 this related to $11.5 or 6.6%
of our revenue. Revenue with extended payment terms amounted to $4.8 million
(2.7% of overall revenue) in 2007 and $4.9 million (2.7% of overall revenue) in
2006.
The
typical arrangement on these extended payment arrangements is one third (1/3)
payable within 30 days, one third (1/3) payable within one year from original
invoice date and the balance two years from the original date of invoice. The
payments are fixed and not at all related to the performance of the
product.
The
Company has been offering these extended payment terms since 2003 in order to
provide flexibility to customers purchasing licenses for its products and
related maintenance. Terms of these transactions range from standard perpetual
license sales that include one year of maintenance to large multi-year
(generally two to five years), multi-product contracts. We offer this form of
payment to all of our customers; it is not based on the sort or type of software
acquired. We charge a separate finance fee for this service. Since 2003, we have
had only one instance of non-payment for an extended terms contract. The amount
was $81,000, which is deemed to be immaterial. There have been no returns for
any extended payment term transaction in the last three years.
Based on
the Company’s successful collection history for deferred payments, product sales
(net of any finance fees) are recognized as revenue upon delivery of the
software. Financing fees are recognized as interest income over the term of the
receivable and amounted to $309,000, $184,000 and $109,000 for fiscal 2008, 2007
and 2006, respectively.
The
accounting for the extended payment arrangements is supported by the guidance
discussed in paragraphs 27 through 30 and paragraphs 112 and 113 of
SOP 97-2, “Software Revenue Recognition” on determination of whether a fee is
fixed and determinable in extended payment arrangements.
The $4.3
million increase in accounts receivable during the first quarter of 2009 is
mainly the result of two factors:
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1.
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Our
largest customer, accounting for 11% of consolidated revenue for the year
ended December 31, 2008 (CDW Corporation), paid an additional $2.5 million
in December of 2008, for accounting or financing purposes on their end, we
presume. This did not occur at the end of March 2009. As a result, amounts
due from CDW Corporation at March 31, 2009 were $2,790,193 as compared to
$580,958 at December 31, 2008. Amounts due per the end of March 2009 were
all within normal payment terms.
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2.
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The
month of March 2009 was particularly strong, compared to January and
February. March sales accounted for 48% of Q1 2009 revenue, and a
significant portion of revenue was recorded in the last two weeks of
March. In Q4 2008, December sales accounted for 40% of Q4 2008
revenue.
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Our mix
of customers and our accounts receivable aging has not changed significantly
from year-end 2008.
We do not
believe the increase in accounts receivable will impact our liquidity for the
following reasons:
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(1)
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The
Company‘s cash and cash equivalents and marketable securities totaled
almost $17 million at March 31,
2009.
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(2)
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The
Company has no debt and has been operating profitably for several
years.
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(3)
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Our
working capital stood at $16.5 million at the end of the first quarter of
2009.
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Comment
4:
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We
note that the identification of the certifying individual at the beginning
of the certifications required by Exchange Act Rule 13a-14(a) also
includes the title of the certifying individual. We note a
similar presentation in your Form 10-Q filed on May 12,
2009. In future filings, the identification of the certifying
individual at the beginning of the certifications should be revised so as
not to include the individual's
title.
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We will
revise the certifications in future filings so as not to include the
individual’s title at the beginning of the certification.
If you
have any questions, or if we may be of any assistance, please do not hesitate to
contact the undersigned at 732-389-8950.
Sincerely,
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/s/
Kevin T. Scull
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/s/
Simon F. Nynens
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Kevin
T. Scull
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Simon
F. Nynens
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Vice
President and Chief Accounting Officer
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Chairman,
President and Chief Executive Officer
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